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© 2016 IHS Markit. All Rights Reserved.© 2016 IHS Markit. All Rights Reserved.

Assessing Risks to the Global Economy Amid Rising Political Uncertainty

AUTOMOTIVE

8 September 2016 | Detroit

Nariman Behravesh, Chief Economist, +1 781 301 9101, [email protected]

© 2016 IHS Markit

Outline of presentation

• Assessing the impacts of Brexit

• How serious is the retreat from globalization?

• Economic policies of the two US presidential candidates

• Global overview

• Economic outlook for key countries and regions

Automotive Conference – Detroit | 8 September 2016

© 2016 IHS Markit

The impact of Brexit on the UK economy

• Weakened business confidence amid heightened, prolonged uncertainty will result in a scaling back of investment and employment plans.

• FDI and portfolio investment into the United Kingdom will likely suffer.• More credit rating downgrades are possible.• The British pound has fallen sharply—more losses to come. • A falling currency will likely push up inflation markedly, eroding consumer

purchasing power.• The weaker pound will help exports, but European/global growth will be

softer.• Asset market declines will mean tighter financial conditions.• Bottom line: The UK economy is headed for a sharp slowdown—growth will

likely be about 0.6% in 2017.


© 2016 IHS Markit

The British pound will depreciate further until the terms of Brexit are clarifiedExchange rate

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2000 2002 2004 2006 2008 2010 2012 2014 2016 2018US dollar/GBP Euro/GBP


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Economic impact of Brexit on European Union• Anti-EU and right-wing nationalist movements could be

strengthened across the bloc.• Investment in the European Union could be hit, reflecting

increased concerns over its future.• Business and consumer confidence has suffered.• Financial market volatility has increased.• Exports to the United Kingdom will be hurt—countries with

particularly high trade volume with the United Kingdom (e.g. Ireland) likely to be most affected.

• The EU reform agenda might be further delayed once Germany has lost one of its “rigor” allies.

• However, investment could be diverted from the United Kingdom to EU countries.

• Frankfurt and Paris could gain as financial centers.• There could be greater reform urgency in the Eurozone.


© 2016 IHS Markit

Europe a la Carte?

European Union28-nation single market of free trade and shared regulation; includes “free movement” of goods, services, capital, and peopleEuro Zone19 countries using euro currencyEuropean Economic AreaProvides access to single market in exchange for payments; has “emergency brake” on free movement of peopleEuropean Free Trade AssociationFree-trade zone and network of agreements with other countriesCustoms UnionCirculates goods without duties, has uniform system for handling importsSchengen Area26-country passport-free travel zone

GDP, 2015

Source: Bloomberg © 2016 IHS Markit


© 2016 IHS Markit

How serious is the retreat from globalization?

• Trade growth has slowed sharply since 2007 because of both structural and cyclical reasons.

• The support for globalization has ebbed and flowed in the past century—Brexit and the anti-trade and anti-immigration rhetoric of the US presidential campaigns are the latest phase.

• While both proponents and opponents of globalization have exaggerated their case, numerous studies have shown that the net effects are positive, and much the same as the impacts of technology.

• Unfortunately, not enough has been done for those hurt by globalization and technology.

• The good news is that a majority of US voters (especially the young) are in favor of both free trade and immigration.


© 2016 IHS Markit

Why has growth in world trade slowed?

Cyclical forces

• Slow growth in aggregate world demand• Weak capital spending • Collapse in commodity markets• Limited progress on trade liberalization

Structural forces

• Shift from manufacturing to services• Rising trade in data and information,

supplanting physical trade• Shortening of global supply chains


© 2016 IHS Markit

The era of rapid growth in world trade volumes ended in 2008World trade


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Economic policies of the US presidential candidates

• Assessing what the presidential candidates will actually do, when in office, is more difficult than usual during this presidential election.

• The Trump trade and immigration slogans will be hard to implement and highly dangerous—a trade war and mass deportations could do serious economic damage

• Clinton has flip-flopped on free trade, so it is difficult to assess what she might do as president.

• Clinton’s budget raises taxes and spending, while Trumps cuts taxes and raises spending.

• The Trump scenario has higher deficits and interest rates.

• Trump’s plan would boost growth initially, but hurt growth in two to three years as both interest rates and the dollar rise sharply.


© 2016 IHS Markit

Preliminary assessment of the impacts of the Clinton and Trump budget proposals

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World GDP growth—another year in low gear

Real GDP


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Real GDP growth in the developed world

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Real GDP growth in key emerging markets: Recessions in Russia and Brazil continue in 2016Real GDP


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European and Japanese central banks will keep policy interest rates low for several more years Real GDP


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Industrial materials prices hit bottom in mid-January

IHS weekly indexes, 2002:1=1


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All industrial materials Chemicals Nonferrous metals


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US crude-oil prices and natural-gas prices

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Crude oil, WTI (Left scale) Natural gas, Henry Hub (Right scale)


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A large US trade deficit will contribute to a retreat in the dollar’s real exchange value in 2017-20Index, 2009 = 1.0


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1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

Major trading partners Other important trading partners


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Brexit will have a limited impact on the US economy

• The UK exit from the European Union will have a small adverse impact through trade channels—a stronger dollar and weaker demand for US exports.

• Real GDP is projected to increase 1.5% in 2016 and 2.4% in 2017 (down 0.2 percentage point from pre-Brexit forecast).

• Consumer spending will drive the expansion forward, supported by growth in employment, real incomes, and household net worth.

• Housing construction will continue to recover in response to pent-up demand from young adults and improved credit availability.

• Recent growth has been held back by an inventory cycle, the rout in the energy sector, and weak exports.

• The US Federal Reserve will be cautious in raising interest rates; the next increase is expected in December.

• Political uncertainty is beginning to take a toll, especially on business investment.


© 2016 IHS Markit

The US forecast is characterized by moderate real GDP growth and a steady unemployment rateReal GDP and unemployment


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After two years of excess accumulation, US inventory investment is being curtailedBillions, annual rate, 2009 dollars


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US economic growth by sectorPercent change

2015 2016 2017 2018Real GDP 2.6 1.5 2.4 2.4Consumption 3.2 2.8 2.6 2.5Residential investment 11.7 4.9 6.7 6.3Business fixed investment 2.1 -0.2 4.0 4.4Federal government 0.0 0.9 0.9 -1.3State & local government 2.9 1.2 0.9 0.9Exports 0.1 -0.4 2.8 4.2Imports 4.6 0.9 4.7 5.4Source: IHS Markit © 2016 IHS Markit


© 2016 IHS Markit

Other key US indicatorsPercent change


2015 2016 2017 2018Industrial production 0.3 -0.9 1.4 3.1

Payroll employment 2.1 1.7 1.2 0.9

Light-vehicle sales (Millions) 17.4 17.4 17.7 17.7

Housing starts (Millions) 1.11 1.18 1.34 1.48

Consumer Price Index 0.1 1.3 2.3 2.1

Core CPI 1.8 2.2 2.1 2.0

Brent crude oil price ($/barrel) 53 43 52 57

Federal funds rate (%) 0.1 0.4 1.0 1.7

10-year Treasury yield (%) 2.1 1.7 2.3 2.9


© 2016 IHS Markit

US services recorded the largest employment increases during the 12 months ending August 2016Change in payroll employment, thousands


-200 -100 0 100 200 300 400 500 600

Mining & loggingManufacturing

UtilitiesState government

InformationFederal government

Wholesale tradeTransport & warehousing

EducationOther services

Local governmentFinancial services

ConstructionRetail trade

Leisure & hospitalityProf. & business servicesHealth & social services

Total change = 2.45 million


© 2016 IHS Markit

US investment in mines and wells is near a trough

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Manufacturing Mines & wells Utilities


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The US fiscal outlook will depend on the next president’s plansBillions of USD, fiscal years


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Unified budget balance (Left scale) Balance as percent of GDP (Right scale)


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Europe will stay on a slow growth path

• After the Brexit vote, the IHS Markit forecast of Eurozone real GDP growth was reduced to 1.5% in 2016 (from 1.7%) and 1.2% in 2017 (from 1.8%).

• Increased uncertainty will discourage capital spending, although some investment will be diverted from the United Kingdom to Eurozone countries.

• Aggressive monetary stimulus, a weaker euro, and reduced fiscal headwinds will help to sustain growth.

• With inflation picking up only gradually, the European Central Bank (ECB) is not expected to raise interest rates until 2019.

• The euro is projected to bottom out near USD1.07 in mid-2017 and then gradually recover to USD1.24 by the end of 2020.

• Ireland, Sweden, Slovakia, and Spain will maintain relatively healthy economic growth, while the United Kingdom, Italy, and France will struggle.


© 2016 IHS Markit

Real GDP growth in Western Europe

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Asia-Pacific will lead all regions in growth

• China’s fixed investment is decelerating as the economy rebalances toward consumer spending and services.

• India’s economy is outpacing China’s and foreign investment is rising, but progress has been slow on Prime Minister Narendra Modi’s reforms.

• Indonesia’s growth is stabilizing in the 4–5% range; capital inflows are critical to financing the country’s significant infrastructure needs.

• New manufacturing hubs such as Vietnam are emerging in Southeast Asia and South Asia as China loses cost competitiveness.

• The information technology-business process outsourcing industry is set for continued rapid growth in India, Malaysia, and the Philippines.

• Japan, Malaysia, and Vietnam would be major beneficiaries if the Trans-Pacific Partnership is implemented.


© 2016 IHS Markit

Real GDP growth in Asia-Pacific

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2015 2016 2017 2018 2019–23


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China’s economic slowdown will continue in 2017

• China’s slowdown is most evident in mining, heavy manufacturing, and utilities; services and light manufacturing are more resilient.

• The impact of Brexit will be limited, and China’s government will support economic growth with more fiscal and monetary stimuli.

• Home sales have picked up in 2016, although high inventories will continue to dampen construction activity.

• A determinedly weak renminbi policy is unlikely; concerns over mass capital flight outweigh potential gains in export cost competitiveness.

• Under China’s 13th Five-Year Plan, services will account for 70% of incremental growth in 2016–20, up from about 60% in 2011–15.

• Vast excess industrial capacity, financed by an explosion of debt, is the biggest threat to China’s growth prospects.


© 2016 IHS Markit

Other emerging markets: Room for hope

• With commodity prices beginning to rise again, the pressure on emerging markets has eased.

• Currencies have recovered some of their losses, allowing central banks to pursue less restrictive policies.

• These more positive trends will be of little comfort those economies with deep-seated problems (e.g. Brazil, Russia, and Venezuela).

• More generally, without structural reforms (to boost productivity growth), most emerging markets are unlikely to see rapid growth rates.

• Geopolitics (e.g. the failed coup in Turkey) are also a huge risk.

• On the other hand, emerging markets are still “the future,” and as they integrate more rapidly into the global economy, trade growth could rebound strongly.


© 2016 IHS Markit

Global growth by region

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EmergingEurope

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© 2016 IHS Markit

Bottom line

• Brexit will not derail global growth, but will condemn it to another year of sluggish growth—the sixth since 2011.

• After the UK vote to leave the European Union, the IHS Markit forecast of global real GDP growth was revised down from 2.5% to 2.4% in 2016 and from 3.1% to 2.7% in 2017.

• The Asia-Pacific region will continue to grow at the fastest rate.

• Emerging markets’ growth will rebound, but will not regain the peak growth rates of the 2000s.

• The US economy is fundamentally strong; consumer spending and homebuilding will drive growth.

• A reversal of globalization is neither new nor inevitable.

• Risks abound, including financial-market turbulence, China’s rising debt and excess capacity, conflicts in the Middle East and Africa, high Eurozone debt burdens, stagnation in developed countries, the fallout from Brexit, and the outcome of the US election.


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